Kerry Back
The XYZ company is considering launching a new product. Sales of the product are expected to rise and then diminish, and it is anticipated that the product will be abandoned after five years.
Sales (in millions of dollars) are projected as follows:
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| 100 | 150 | 200 | 120 | 80 |
Labor and material costs for the product would be 50% of sales revenue.
For the first two years, the new product would reduce sales of existing products by $20 million and $10 million, respectively. The existing products have the same 50% gross margin.
Incremental selling, general, and administrative expenses are forecast to be (in millions of dollars):
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|---|
| 20 | 25 | 15 | 10 | 5 |